Everyone has a favorite statistic, and those who are pessimistic about the U.S. economy love to cite the trade deficit. The numbers released on May 11 were no exception. While the trade figure for March was a bit better than expected, the gap for the first three months of 2005 is running at a $696 billion annual rate. That's well ahead of the $617 billion total for 2004, guaranteeing another chorus of warnings about a dollar crisis and the danger of excess spending.
Optimists are quick to point to the latest figures on productivity growth. Data released on May 5 by the Bureau of Labor Statistics show output per hour rising at a 2.9% rate over the past 10 years, not much below the 1960s postwar high of 3.3%. From the perspective of long-term productivity growth, the U.S. couldn't be much healthier.
Which is more important, big trade deficits or high productivity? For now it looks as if productivity wins. Why? The net wealth of the U.S. is huge compared to 10 years ago, even after taking into account that Americans owe foreigners some $3 trillion because of cumulative trade gaps. Rising net wealth means the positive influence of higher productivity -- which boosts economic output -- has been stronger than the negative impact of big trade deficits.
Think about it this way: The U.S. is like a family enjoying rising income even as it takes on sizable debt -- not too unusual in these days of big mortgages. You'd worry if such a family had to sell off assets or draw down savings to pay for today's consumption, a sign that it was living beyond its means. The family would soon be in trouble if it didn't curtail spending. But if the family's net worth -- assets minus debt -- is going up, its financial position is actually improving.
That's essentially what's happening to the financial position of the U.S.: Not only is it getting better, it's getting a lot better. The best way to show this is to look at a new measure of national wealth that I call "net real wealth per capita." Start with the net worth of households as reported by the Federal Reserve. Then subtract federal, state, and local debt, and adjust for inflation and changes in population. What's left is a figure that measures, somewhat imperfectly, the average net value of the liabilities and assets of Americans, assuming that they are responsible for the government's debt as well as their own.
By this measure, net real wealth per person is up 16% since the end of 2002. While it's still a bit below the all-time high reached in early 2000, over the past 10 years it has risen 57%. That's one of the biggest 10-year rises on record, beaten only by the decade ending in 1999. By comparison, net real wealth per person rose by 36% in the 1980s, 21% in the 1970s, and 32% in the 1960s.
The implication: Despite pessimists' fears, the U.S. is not drawing down national wealth to pay for imports. As long as that stays true, big foreign deficits are sustainable.
What could foil this scenario? First, productivity growth could go into an extended stall. It was still rising at a 2.6% rate in the first quarter, but if productivity growth slows -- not just for a quarter, as some expect, but for much longer -- asset values would drop.
Second, it could turn out that the housing boom is really a bubble. In that case, if it were to pop, net worth would fall. But even if home values fell by 10% nationally, the U.S. would still have experienced a 50% gain in net real wealth per capita over the past decade.
This means that our ability to cope with big trade deficits depends on continued improvements in efficiency and technology, not the smoke and mirrors of a housing bubble. So for now, the optimists are ahead.
By Michael J. Mandel